Art, a taxable commodity, with legal expert Diana Wierbicki

by leslierankowfinearts

AS YOU BUY OR SELL A WORK OF ART, STAYING OUT OF TAX TROUBLE IS AS IMPORTANT A CONSIDERATION AS THE PROVENANCE, CONDITION AND PERIOD OF THE WORK. SINCE ART HAS BECOME A GLOBAL, MULTI-BILLION DOLLAR INDUSTRY, AND HAS BECOME A SIGNIFICANT CONTRIBUTOR TO A STATE’S TAX COFFERS, PARTICULARLY NEW YORK STATE, ART DEALERS AND COLLECTORS HAVE BECOME THE FOCUS OF SCRUTINY BY STATE TAX AUTHORITIES. IN THIS VIGOROUS INTERNATIONAL MARKET, ALLEGATIONS HAVE SURFACED THAT ART TRANSACTIONS ARE SOMETIMES A MEANS TO LAUNDER MONEY AND AVOID TAXES.

AS NOVEMBER IS AUCTION MONTH IN NEW YORK AND WE ARE RAPIDLY APPROACHING MIAMI ART BASEL, A SPECTACULAR NUMBER OF WORKS SPANNING IMPRESSIONIST, MODERN, POST-WAR, CONTEMPORARY, LATIN AMERICAN AND AMERICAN WORKS OF ART WILL EXCHANGE HANDS. THE LRFA BLOG PRESENTS THIS TIMELY CONTRIBUTION TO FORBES MAGAZINE, POSTED IN MAY 2016, BY ESTEEMED LEGAL EXPERTS, DIANA WIERBICKI AND SETH COHEN OF WITHERS BERGMAN. DIANA WIERBICKI IS GLOBAL HEAD OF ART LAW AND SETH COHEN IS A PARTNER SPECAILIZING IN TAX CONTROVERSIES AT WITHERS BERGMAN.

Given that the art market is a multi-billion dollar industry and that so many of the world’s art sales and purchases take place in New York State (at record breaking prices), it is no wonder that cash-strapped state authorities are broadly searching for instances of tax evasion in the art world. We are seeing a tremendous increase in audits and investigations in this area and two recent settlements show the investigations are resulting in the payment of millions of dollars to the state. With results this profitable, it is likely that NYS investigations of art transactions will continue.

NYS is currently focusing on the use of resale certificates (which exempt a purchase from sales tax) in connection with art purchases. Under New York’s tax law, items purchased for resale must not be used for any other purpose, meaning personal enjoyment is a prohibited use. A person need not have the intent to evade a tax to be in violation of this law and may innocently fail to comply with the law simply by not knowing its complicated rules. Bottom line? This type of mistake can be costly and, in an industry where reputation is key, serious damage can be inflicted on an otherwise pristine reputation.

New York Attorney General Eric Schneiderman is on the hunt for tax abuses in the art world. (Photo by Eduardo Munoz Alvarez/Getty Images)

On May 3rd of this year, NYS Attorney General Eric Schneiderman released the following statement: “We are committed to rooting out tax abuses wherever we find them, especially in the art world, where the difference can be hundreds of thousands — if not millions — of dollars in lost tax revenue per sale. When art collectors don’t pay their fair share, law abiding New Yorkers should not be stuck footing the bill.” Strong words that are being backed-up with strong action.

The two settlements recently in the press involve the well-known real estate investor Aby Rosen and art sales executive Victoria Gelfand. It was reported that they each own companies essentially formed to buy and sell art using resale certificates; they purchased art that was used for something other than resale; and the conditions of their settlements with NYS include future sales and use tax compliance.In Rosen’s case, his companies were used to purchase and commission 200 works of art (all but one of which were acquired with a resale certificate) for a total of $80 million from 2002 through 2015. The art was used for the purpose of Rosen’s enjoyment at his personal residences and to enhance his real estate company’s brand by displaying the art in his offices. According to the Attorney General, Rosen should have paid sales tax on each artwork when purchased or, alternatively, if the art was originally intended to be resold, sales tax should have been paid at the point the use of the art “diverted” to an ineligible use. Rosen settled with NYS for $7 million.

Gelfand used her companies to purchase 30 works of art for a total of $1 million from 2005 through 2013. The settlement was paid only with respect to works that were displayed in her home. Of particular note is the following quote from the Attorney General’s statement: “Art buyers may not avoid sales or use tax simply by claiming that artwork they enjoy at home is intended for resale…that rule is clear, and my office is committed to ensuring the art industry follows it.” Gelfand settled with NYS for $200,000.

The following tips highlight a few important takeaways from these settlements.

Resale Means Exclusively for Resale

The sole purpose and intent of an art purchase must be to resell the art. For example, in P-H Fine Arts Ltd. v. New York State Tax Appeals Tribunal, the taxpayer, Bob Guccioni, purchased artwork to enhance his “image as a publisher,” as well as the image of his business. Consequently, although the taxpayer intended to resell the art, the court denied his resale certificate because reselling was not his sole reason for purchasing the artwork.

IN PART TWO OF THE LRFA BLOG, THE LEGAL DEFINITIONS THAT APPLY TO RESALE OF ARTWORKS IN NEW YORK STATE ARE DEFINED.

Diana WierbickiSenior PartnerWithers Bergman

Guest post by Diana Wierbicki and Seth Cohen, FORBES , May 10, 2016, in Janet Novak: Taxing Matters
Diana Wierbicki is global head of art law and Seth Cohen is a partner specializing in tax controversies at Withers Bergman.